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Google’s Nexus 7 Spills Its Guts

Look! Margins!

What do we have here? Google’s (Nasdaq: GOOG) brand new Nexus 7 tablet is now starting to reach industry analysts, who want little more than to promptly destroy the tablet. Both iSuppli and iFixit have gotten their hands on the device and torn it down. What did they find lurking inside? Margins! Sort of.

I’ll believe it when I see itThere weren’t any real meaningful component surprises found beneath the surface. We already knew the juicy details like the NVIDIA(Nasdaq: NVDA) quad-core Tegra 3 powering its apps. The device is one of the first tablets on the market to feature a near-field communications, or NFC, chip. In this case, NXP Semiconductor(Nasdaq: NXPI) sources the chip that will play a large role in mobile payments.

Source: iFixit.

Sharp makes an Android tablet with NFC, but it’s geared towards the Japanese market. As far as mainstream domestic ones, there simply aren’t any. Apple’s (Nasdaq: AAPL) iPad certainly doesn’t carry one, nor does any iDevice. The Nexus 7 also just received a software update to include Google Wallet functionality, tapping its NFC powers. This is a little odd, because it’s rather unwieldy to pay for a cup of coffee by pulling out your 7-inch tablet. It’s almost as awkward as using a full-sized iPad as a camera.

Dollars and senseiSuppli provides a preliminary bill of materials, and compares it to Amazon.com’s (Nasdaq: AMZN)Kindle Fire as its closest competitor, which is now nearly a year old. The supply chain specialist estimates the total component cost at just under $152, before including other operating expenditures like distribution, sales, or various licensing payments. Here are some notable mentions:

Components

Nexus 7 (8 GB)

Nexus 7 (16 GB)

Kindle Fire (8 GB)

Memory

$13.50

$21

$13.35

Display and touchscreen

$62

$62

$59

Processor

$21

$21

$13.50

Components and manufacturing total

$159.25

$166.75

$139.80

Retail price

$199

$249

$199

Gross margin

20%

33%

30%

Source: IHS iSupply July 2012.

The Kindle Fire has seen its component cost come down significantly since its release. Its original costs were estimated near $192 and have fallen to $133.80 (before manufacturing). The 8 GB Nexus 7 costs $18 more in components than the Kindle Fire.

When you include manufacturing costs, the total for the 8 GB model increases to $159, meaning Google may see a gross margin of 20%. After including those additional costs, iSuppli believes that Google will likely break even on the 8 GB model. Especially when you include the $25 Google Play credit that Big G is handing out as a promotion for an unspecified "limited time."

However, if you look at the 16 GB model, the extra storage costs an incremental $7.50, while it retails for an additional $50. On the 16 GB model, there is some margin to make. For comparison, when the third-generation iPad was released, the entry-level 16 GB model fetched an estimated 37% gross margin (including manufacturing).

Three’s companyThese numbers also help explain why the Nexus 7, which is about to launch at third-party retailers, is only available in the 16 GB model. Retailers need to try and make some money for their troubles, and that wouldn’t be possible with the 8 GB breakeven model. By making a couple of extra bucks on the high-end model, Google can pay for distribution costs and help subsidize any early losses it incurs on the low-end model.

Amazon is undoubtedly preparing to update its Kindle Fire, and presumably would keep a similar price point, but beef up the specs. The second-generation is even rumored to carry the very same Tegra 3. I’d also expect it to continue selling its own newer device at cost, while potentially discounting the first-generation Kindle Fire.

Within a matter of months, we’ll likely see Amazon and Google dominating the $200 price point with breakeven devices, and Apple will probably sit just above them with a slightly larger (7.85-inch), slightly more expensive ($250) offering, leaving little for everyone else.

Apple’s inevitable move downmarket with an iPad Mini is one reason the company has plenty of room to run. The Motley Fool has just launched a brand new premium research service all about Apple. Sign up for a comprehensive report that covers everything a current or prospective shareholder would need to know. NVIDIA’s mobile processors continue to gain traction as it taps into the next trillion-dollar revolution. This special free report will detail the chipmaker’s prospects as smartphone and tablet adoption continues to skyrocket.

Author

Evan is a Senior Technology Specialist at The Motley Fool. He was previously a Senior Trading Specialist at Charles Schwab, and worked briefly at Tesla. Evan graduated from the University of Texas at Austin, and is a CFA charterholder.